Antitrust policy today is an anomaly. On the one hand, antitrust is thriving internationally. On the other hand, antitrust’s influence has diminished domestically. Over the past thirty years, there have been fewer antitrust investigations and private actions. Today the Supreme Court complains about antitrust suits, and places greater faith in the antitrust function being subsumed in a regulatory framework. So what happened to the antitrust movement in the United States?

Two import factors contributed to antitrust policy’s domestic decline. The first is salience, especially the salience of the U.S. antitrust goals. In the past thirty years, enforcers and courts abandoned antitrust’s political, social, and moral goals, in their quest for a single economic goal. Second antitrust policy increasingly relied on an incomplete, distorted conception of competition. Adopting the Chicago School’s simplifying assumptions of self-correcting markets composed of rational, self-interested market participants, the courts and enforcers sacrificed important political, social, and moral values to promote certain economic beliefs.

With the anger over taxpayer bailouts for firms deemed too-big-and-integral-to-fail, the wealth inequality that accelerated over the past thirty years, and the current budget cuts and austerity measures, the United States is ripe for a new antitrust policy cycle.

This Article first summarizes the quest during the past 30 years for a single economic goal. It discusses why this quest failed. Four oft-cited economic goals (ensuring an effective competitive process, promoting consumer welfare, maximizing efficiency, and ensuring economic freedom) never unified antitrust analysis. After discussing why it is unrealistic to believe that a single well-defined antitrust objective exists, the Article proposes how to account antitrust’s multiple policy objectives into the legal framework. It outlines a blended goal approach, and the benefits of this approach in providing better legal standards and reviving antitrust’s relevance.

Joe Henrich, Stephen Heine, and Ara Norenzayan recently posted their paper, “The Weirdest People in the World?” on SSRN. Here’s the abstract.

* * *

Behavioral scientists routinely publish broad claims about human psychology and behavior in the world’s top journals based on samples drawn entirely from Western, Educated, Industrialized, Rich and Democratic (WEIRD) societies. Researchers – often implicitly – assume that either there is little variation across human populations, or that these “standard subjects” are as representative of the species as any other population. Are these assumptions justified? Here, our review of the comparative database from across the behavioral sciences suggests both that there is substantial variability in experimental results across populations and that WEIRD subjects are particularly unusual compared with the rest of the species – frequent outliers. The domains reviewed include visual perception, fairness, cooperation, spatial reasoning, categorization and inferential induction, moral reasoning, reasoning styles, self-concepts and related motivations, and the heritability of IQ. The findings suggest that members of WEIRD societies, including young children, are among the least representative populations one could find for generalizing about humans. Many of these findings involve domains that are associated with fundamental aspects of psychology, motivation, and behavior – hence, there are no obvious a priori grounds for claiming that a particular behavioral phenomenon is universal based on sampling from a single subpopulation. Overall, these empirical patterns suggests that we need to be less cavalier in addressing questions of human nature on the basis of data drawn from this particularly thin, and rather unusual, slice of humanity. We close by proposing ways to structurally re‐organize the behavioral sciences to best tackle these challenges.

Below the jump you can watch an outstanding and fascinating video episode, “Mind over Money,” by PBS’s NOVA, that asks the question “Can markets be rational when humans aren’t?” and that includes significant segments describing some of the work by Situationist friend Jennifer Lerner.

(We’ve placed the (52 minute) video after the jump because it plays automatically.)

A few weeks ago, the grandfather of law and economics, Richard Posner, decided to weigh in on President Obama’s proposal for a Consumer Financial Protection Agency (CFPA), which would regulate consumer financial products including mortgages and credit cards. He bemoaned the idea of a new regulatory body—dismissing it as the misguided vision of a cadre of idealistic behavioral economists.

As he explained, in an op-ed in the Wall Street Journal, “Behavioral economists are right to point to the limitations of human cognition. But if they have the same cognitive limitations as consumers, should they be designing systems of consumer protection?”

The enemy is a familiar one for Posner and any self-respecting classical liberal: paternalism.

Posner’s concern is that “the agency will steer consumers to those financial products that it thinks best for them, whatever they naïvely think.”

That statement is misleading and problematic for two reasons.

First, the aim of the CFPA is not to force consumers to agree to something they wouldn’t otherwise agree to; the point is to promote real disclosure so that consumers can make informed decisions. Thus, the impetus behind the plan for pre-approved “plain vanilla” financial product forms, for example, is not a desire to constrain choice, but to ensure a format that customers can understand. Without understanding there is no free choice.

Second, even if we accept Posner’s inaccurate and unfair characterization of the agency as paternalistic, that must certainly be better than the status quo that Posner tacitly supports in which companies steer consumers to those financial products they think best for the company, whatever consumers naïvely think. For someone committed to preserving the autonomy of the individual to pursue his own conception of the good, the world Posner affirms is a coercive nightmare far worse than his caricature of America’s future under the CFPA Act: at least in the latter case, the implicated entity is attempting to pursue the best interests of the American public, not its own.

What is to explain Posner’s inability to see that under the current system individuals lack free choice? After all he is a very smart guy and the evidence on how mortgage and credit card products are deliberately created and marketed to compel consumers to step into higher cost products is overwhelming.

Why is Posner so ready to see the government as the totalitarian bogeyman and so unwilling to see the consumer financial products industry in this role?

It is hard to say, but I expect part of it grows out of being stuck in a mid-20th-Century mindset.

Richard Posner, born in 1939, came of age during the Cold War. (Interesting aside: a thirteen-year-old Posner agreed to give his electric train set to the Rosenberg children when they visited his house shortly after their parents were executed.) During that time, the enemy was the totalitarian state—the overbearing government that thought it knew what was best for the people. Corporations, by contrast, were the good guys. They listened to our wants and responded to our desires. They helped keep us free and happy.

Today, rather than looking objectively at what presents the greatest danger to liberty; he is stuck looking for the nefarious influence of big government. And that’s where he has gone wrong.

The CFPA isn’t a big government command-and-control-style creation. It is minimalist, reflecting the ideas of a younger generation of law professors and economists—including Posner’s colleagues, Cass Sunstein and Richard Thaler—dedicated, like Posner, to an environment of free choice, but aware that the government must sometimes act to ensure that such freedom exists. It is hard to see how an agency that requires credit card companies to not print their U.S. contracts in Arabic or incomprehensible legalese is a real threat to liberty; it seems like a sensible way to make sure that consumers can accurately compare products and that markets work efficiently.

And it is not clear that the CFPA’s oversight would actually hurt the profitability of companies. Sure, entities that have survived the last few years on trickery and outright deceit would struggle in the new climate of openness, clarity, and disclosure, but what about all of those honest consumer financial businesses that were kept out of the market because they were undercut by sharp practices?

Posner needs to get with the times or get out of the way. His refrain, “too much, too soon, too costly,” is a tired old mantra that ignores the dangers, abuses, and costs hidden in the status quo.

In the following TED Talk video, Dan Ariely, Professor of Economics at Duke University, behavioral economist, and the author of Predictably Irrational, offers some now-standard but still interesting illustrations of how situation influences our perception and choices.

Ori Brafman and his brother Rom Brafman visit Google’s Mountain View, CA headquarters to discuss Ori’s book “Sway: The Irresistible Pull of Irrational Behavior.” This event took place on June 13, 2008, as part of the Authors@Google series.

Why is it so difficult to sell a plummeting stock or end a doomed relationship? Why do we listen to advice just because it came from someone “important”? Why are we more likely to fall in love when there’s danger involved? In Sway, renowned organizational thinker Ori Brafman and his brother, psychologist Rom Brafman, answer all these questions and more.

Drawing on cutting-edge research from the fields of social psychology, behavioral economics, and organizational behavior, Sway reveals dynamic forces that influence every aspect of our personal and business lives, including loss aversion (our tendency to go to great lengths to avoid perceived losses), the diagnosis bias (our inability to reevaluate our initial diagnosis of a person or situation), and the “chameleon effect” (our tendency to take on characteristics that have been arbitrarily assigned to us).

Ever wonder why so much time is spent comparing jewelry and telling personal anecdotes in presidential debates (see short video above), even as many of the larger policy questions remain largely unexplored? There are, of course, many reasons (some of which have been noted in previous Situationist posts), but Friday’s wrist-off reminded us of one key contributor: “the identifiable victim effect” — greater sympathy is felt for identifiable victims than for statistical victims.

In this paper we focus on yet another reason for why taxation and government spending can go awry: human psychology, and specifically the lack of proportionality between human sympathy and the wants and needs of those toward whom the sympathy, or lack thereof, is directed. As Adam Smith observed in the Theory of Moral Sentiments, we often feel little sympathy toward people who are highly deserving of it. He illustrates the point vividly with the hypothetical case of a European man who gets more upset over losing his little finger than over a calamity that wipes out the entire population of China. However, the disproportionality can also go in the opposite direction. As Smith also points out, “we sometimes feel for another, a passion of which he himself seems to be altogether incapable,” as illustrated by the dismay of the mother of a sick child which, as he puts it, “feels only the uneasiness of the present instant, which can never be great” . . . . Smith adds dryly that “we sympathize even with the dead, who themselves experience nothing”. . . . Our main focus is on one specific source of arbitrariness in human sympathy: the disproportionate sympathy and attention to identifiable as compared with statistical victims.

Here is the abstract.

We first review research showing (1) that people respond more strongly to identifiable than statistical victims even when identification provides absolutely no information about the victims, (2) that the identifiable victim effect is a special case of a more general tendency to react more strongly to identifiable others whether they evoke sympathy or other emotions, and (3) that identifiability influences behavior via the emotional reactions it evokes. Next, we discuss the normative status of the effect, noting that, contrary to the usual assumption that people overreact to identifiable victims, identifiability can shift people’s responses in a normatively desirable direction if people are otherwise insufficiently sympathetic toward statistical victims. Finally, we examine implications of the identifiable victim effect for public finance. We show that the identifiable victim effect can influence the popularity of different policies, for example, naturally favoring hidden taxes over those whose incidence is more easily assessed, since a hidden tax has no identifiable victims. Identifiable other effects also influence public discourse, with much of the debate about government spending and taxation being driven by vivid exemplars – iconic victims and perpetrators – rather than any rational calculation of costs and benefits.

To read previous Situationist posts discussing some of the problems posed by the way we do or do not emotionally connect with victims, see “An Apathy Epidemic” and “Too Many To Care.”

In July, The Economist had a nice article on the burgeoning field of neuroeconomics, titled “Do Economists Need Brains.” We’ve excerpted a few chunks from that article below.

* * *

In the late 1990s a generation of academic economists had their eyes opened by Mr LeDoux’s and other accounts of how studies of the brain using recently developed techniques such as magnetic resonance imaging (MRI) showed that different bits of the old grey matter are associated with different sorts of emotional and decision-making activity. The amygdalas are an example. Neuroscientists have shown that these almond-shaped clusters of neurons deep inside the medial temporal lobes play a key role in the formation of emotional responses such as fear.

These new neuroeconomists saw that it might be possible to move economics away from its simplified model of rational, self-interested, utility-maximising decision-making. Instead of hypothesising about Homo economicus, they could base their research on what actually goes on inside the head of Homo sapiens.

The dismal science had already been edging in that direction thanks to behavioural economics. Since the 1980s researchers in this branch of the discipline had used insights from psychology to develop more “realistic” models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics had the potential, some believed, to go further and to embed economics in the chemical processes taking place in the brain.

Early successes for neuroeconomists came from using neuroscience to shed light on some of the apparent flaws in H. economicus noted by the behaviouralists. One much-cited example is the “ultimatum game”, in which one player proposes a division of a sum of money between himself and a second player. The other player must either accept or reject the offer. If he rejects it, neither gets a penny.

According to standard economic theory, as long as the first player offers the second any money at all, his proposal will be accepted, because the second player prefers something to nothing. In experiments, however, behavioural economists found that the second player often turned down low offers—perhaps, they suggested, to punish the first player for proposing an unfair split.

Neuroeconomists have tried to explain this seemingly irrational behaviour by using an “active MRI”. In MRIs used in medicine the patient simply lies still during the procedure; in active MRIs, participants are expected to answer economic questions while blood flows in the brain are scrutinised to see where activity is going on while decisions are made. They found that rejecting a low offer in the ultimatum game tended to be associated with high levels of activity in the dorsal stratium, a part of the brain that neuroscience suggests is involved in reward and punishment decisions, providing some support to the behavioural theories.

As well as the ultimatum game, neuroeconomists have focused on such issues as people’s reasons for trusting one another, apparently irrational risk-taking, the relative valuation of short- and long-term costs and benefits, altruistic or charitable behaviour, and addiction. Releases of dopamine, the brain’s pleasure chemical, may indicate economic utility or value, they say. There is also growing interest in new evidence from neuroscience that tentatively suggests that two conditions of the brain compete in decision-making: a cold, objective state and a hot, emotional state in which the ability to make sensible trade-offs disappears. The potential interactions between these two brain states are ideal subjects for economic modelling.

Already, neuroeconomics is giving many economists a dopamine rush. For example, Colin Camerer of the California Institute of Technology, a leading centre of research in neuroeconomics, believes that incorporating insights from neuroscience could transform economics, by providing a much better understanding of everything from people’s reactions to advertising to decisions to go on strike.

At the same time, Mr Camerer thinks economics has the potential to improve neuroscience, for instance by introducing neuroscientists to sophisticated game theory. “The neuroscientist’s idea of a game is rock, paper, scissors, which is zero-sum, whereas economists have focused on strategic games that produce gains through collaboration.” Herbert Gintis of the Sante Fe Institute has even higher hopes that breakthroughs in neuroscience will help bring about the integration of all the behavioural sciences—economics, psychology, anthropology, sociology, political science and biology relating to human and animal behaviour—around a common, brain-based model of how people take decisions

* * *

However, not everyone is convinced. The fiercest attack on neuroeconomics, and indeed behavioural economics, has come from two economists at Princeton University, Faruk Gul and Wolfgang Pesendorfer. In an article in 2005, “The Case for Mindless Economics”, they argued that neuroscience could not transform economics because what goes on inside the brain is irrelevant to the discipline. What matters are the decisions people take—in the jargon, their “revealed preferences”—not the process by which they reach them. For the purposes of understanding how society copes with the consequences of those decisions, the assumption of rational utility-maximisation works just fine.

* * *

The big question now is whether the tools of neuroscience will allow economics to fulfill Edgeworth’s vision—or, if that is too much to ask, at least to be grounded in the physical reality of the brain. Studies in the first decade of neuroeconomics relied heavily on active MRI scans. Economists’ initial excitement at being able to enliven their seminars with pictures of parts of the brain lighting up in response to different experiments (so much more interesting than the usual equations) has led to a recognition of the limits of MRIs. “Curiosity about neuroscience among economists has outstripped what we have to say, for now,” admits Mr Camerer.

* * *

Still, Mr Camerer is confident that neuroeconomics will deliver its first big breakthroughs within five years. Likewise, Mr McCabe sees growing sophistication in neuroeconomic research. For the past four years, a group of leading neuroeconomists and neuroscientists has met to refine questions about the brain and economic behaviour. Researchers trained in both neuroscience and economics are entering the field. They are asking more sophisticated questions than the first generation “spots on brains” experiments, says Mr McCabe, such as “how these spots would change with different economic variables.” He expects that within a few years neuroeconomics will have uncovered enough about the interactions between what goes on in people’s brains and the outside world to start to shape the public-policy agenda—though it is too early to say how.

* * *

To access the whole article, click here. For a collection of related Situationist posts click here and here.

Dan Ariely, Professor of Economics at Duke University, has an article in the UK publication “The Independant,” in which he details some of the scenarios his team studied that show how people can behave irrationally in various situations. Part of the article is excerpted below.

* * *

Relativity

Next time you hit the town in search of a date, take a friend who looks similar to you, but is slightly less attractive. We presented participants with two portraits – Mike and John – and asked them to choose whom they’d rather date. For half the participants we distorted the picture of Mike and added it to the set, so they had John, Mike and an ugly version of Mike to choose from. For the other half of the students, we distorted John, so they had Mike, John and an ugly John.

When the ugly version of Mike was presented, the attractive version of Mike became the most desirable date. And when the ugly version of John was presented, John’s attractive version became the most desirable.

It is very hard for us to evaluate things in absolute terms. So, we evaluate products and people in relative terms, which makes us vulnerable to this kind of trap, called the asymmetric dominance effect.

Spending power

We asked a group of MBA students to write down the last two digits of their Social Security number next to the descriptions of a few products. We then asked them if they would pay the amount of money indicated by these numbers (79 became $79 and so on) for each of the products.

We then asked them to bid on the items in an auction. It turned out that people with higher Social Security numbers were willing to pay more.

What was going on? It’s not that people with high Social Security numbers are willing to pay more for everything in general. Instead, it is what’s known as the power of first decision. Once people start thinking of something as having a specific value, they do so not just once, but repeatedly.

So we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult. Once you’ve offered to pay for the delightful Thanksgiving dinner, your mother-in-law will remember the incident for years to come. And if you’ve ever offered a potential romantic partner the chance to cut to the chase, split the cost of the courting process, and simply go to bed, the odds are that you will have wrecked the romance forever.

My good friends Uri Gneezy (a professor at the University of California at San Diego) and Aldo Rustichini (a professor at the University of Minnesota) provided a very clever test of the long-term effects of a switch from social to market norms. A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. Uri and Aldo concluded that the fine didn’t work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late — as they occasionally were — they felt guilty about it — and their guilt compelled them to be more prompt in picking up their kids in the future. (In Israel, guilt seems to be an effective way to get compliance.) But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.

But the real story only started here. The most interesting part occurred a few weeks later, when the day care center removed the fine. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. Once the fine was removed, the behavior of the parents didn’t change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed).

This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose — once a social norm is trumped by a market norm — it will rarely return.

* * *

To listen to an interesting, nine-minute All Things Considered interview of Dan Ariely, click here. In addition, a podcast with an interview of Professor Ariely and describing more of his research can be found at Open Source, while an interview with him from ABC Radio National can be heard by clicking here. Image from Harper Collins. We’ll have another post on Ariely’s book later this week.

Human behavior is not always consistent with standard rational choice predictions. The much-investigated variety of apparent deviations from rational choice predictions provides a promising arena for the merger of economics and biology. Although little is known about the extent to which other species also exhibit these seemingly irrational patterns of human decision-making and choice behavior, similarities across species would suggest a common evolutionary root to the phenomena.

The present study investigated whether chimpanzees exhibit an endowment effect, a seemingly paradoxical behavior in which humans tend to value a good they have just come to possess more than they would have only a moment before. We show the first evidence that chimpanzees do exhibit an endowment effect, favoring items they just received more than items they prefer that could be acquired through exchange. Moreover, we demonstrate that – as predicted – the effect is far stronger for food than for less evolutionarily salient objects, perhaps due to historically greater risks associated with keeping a valuable item versus attempting to exchange it for another. These findings suggest that the larger set of seeming deviations from rational choice predictions may be common to humans and chimpanzees, and that the evaluation of these through a lens of evolutionary relevance may yield further insights in both humans and other species.

Recent work at the intersection of law and behavioral biology has suggested numerous contexts in which legal thinking could benefit by integrating knowledge from behavioral biology. In one of those contexts, behavioral biology may help to provide theoretical foundation for, and potentially increased predictive power concerning, various psychological traits relevant to law. This Article describes an experiment that explores that context.

The paradoxical psychological bias known as the endowment effect puzzles economists, skews market behavior, impedes efficient exchange of goods and rights, and thereby poses important problems for law. Although the effect is known to vary widely, there are at present no satisfying explanations for why it manifests when and how it does. Drawing on evolutionary biology, this Article provides a new theory of the endowment effect. Briefly, we hypothesize that the endowment effect is an evolved propensity of humans and, further, that the degree to which an item is evolutionarily relevant will affect the strength of the endowment effect. The theory generates a novel combination of three predictions. These are: (1) the effect is likely to be observable in many other species, including close primate relatives; (2) the prevalence of the effect in other species is likely to vary across items; and (3) the prevalence of the endowment effect will increase or decrease, respectively, with the increasing or decreasing evolutionary salience of the item in question.

The authors tested these predictions in a chimpanzee (Pan troglodytes) experiment, recently published in Current Biology. The data, further explored here, are consistent with each of the three predictions. Consequently, this theory may explain why the endowment effect exists in humans and other species. It may also help both to predict and to explain some of the variability in the effect when it does manifest. And, more broadly, the results of the experiment suggest that combining life science and social science perspectives could lead to a more coherent framework for understanding the wider variety of other cognitive heuristics and biases relevant to law.